Government hikes import tax on gold by 50%

ETFs allowed to park gold with banks

The government today increased customs duty on gold and platinum by 2 percentage points to 6% to cut down imports of these metals into the country. It also allowed gold exchange traded funds (ETFs) to deposit part of the physical gold held by them with banks and proposed relaxation in the Gold Deposit Scheme of banks to make individual investors put their idle gold in circulation. 

“In addition to providing a link between the Gold ETF and the Gold Deposit Scheme, the government has also decided to increase the import duty on gold and platinum from 4% to 6% with immediate effect,” Department of Economic Affairs Secretary Arvind Mayaram told a press conference. He said the duties would be reviewed after some time if there was a moderation in gold imports.

With 2% increase in import duty, gold has become costlier by Rs 350 per 10 grams for Indian consumers effective immediately. Increase in duty is expected to lead to smuggling and domestic jewellery consumers may also move to smuggled gold to save cost.

In Mumbai’s Zaveri Bazaar, gold was trading at Rs 30,415 per 10 grams in late Monday afternoon. But, soon after the government’s announcement of a rise in import duty, gold price shot up in evening trade. Traders delayed invoicing of existing orders to capture the additional income. Gold was up by Rs 315 in New Delhi to Rs 31,250 per 10 grams.

Asked whether a higher duty would lead to increase in smuggling of the commodity, Revenue Secretary Sumit Bose said the government had many options to deal with that. “All that will  be activated.”

The gold deposit scheme will be modified to make it attractive for individuals. The minimum quantity of gold that may be deposited will be reduced and the minimum tenure of deposit will be reduced to six months from three years at present. By brining gold lying in stock into circulation these measures are expected to partially meet the requirements of jems and jewellery trade.

Mayaram said the steps would lead to moderation in import of the yellow metal as the additional gold held by individuals and mutual funds would come out in the market and the demand would be met from within the country. He said mutual funds will get marginal interest by depositing the gold with banks.

On allowing ETFs to deposit gold with banks, Bhargav Vaidya, an analyst said, “It is a good step with no measure implication going forward especially with ETF allowed to deposit with banks to avail gold.”

Gold imports in 2011-12 stood at $56.5 billion and, in the April-December 2012 these are estimated at $38 billion. This has put pressure on the country’s current account deficit, which swelled to 4.6% of the GDP in the first half of the current financial year.

In gold ETF units are sold to subscribers through ‘authorized participants’ and are traded on the exchange. The units are backed by physical gold held by the mutual fund. Money collected under any Gold ETF is invested by the mutual fund primarily (a minimum of 90%) in gold or gold related instruments notified by market regulator.

The Gold Deposit Scheme is offered by a number of banks. Banks accept gold deposited by clients. It is on-lent by the banks to the gems and jewellery trade.  At the end of the deposit period, the depositor is entitled to a return of physical gold or its equivalent in cash at the current market price of gold.

Banks have been advised to notify the changes in the Gold Deposit Scheme in the next two to three weeks. The notification of the Scheme will be modified by the finance ministry. The Reserve Bank of India will modify its guidelines reflecting these changes. The Securities & Exchange Board of India will issue a circular enabling Gold ETFs to deposit part of the physical stock of gold held by them with banks under the Scheme. 

Consequential changes in additional customs duty and excise duty will also be carried out in the notifications dealing with the import duty/excise duty on gold bars, gold ores and refined gold.

In January 2012, basic customs duty was increased from Rs 300 per 10 gram to an ad valorem rate of 2% on standard gold bars and on non-standard gold bars to 5%. Further, in the Budget in March 2012 it was doubled to four% and 10%, respectively.